Executory Contracts and Lease-to-Own Real Estate

An executory contract is a type of long-term agreement real estate contract that resembles a rent-to-own arrangement. The buyer lives on the property but does not own it until the end of the contract. The seller only gives the buyer title to the property once all payments are complete.

An executory contract must meet certain requirements to be valid. Texas Property Code 5.062 mandates the following:

• The length of the contract must be longer than six months or 180 days.
• The buyer must use the property mainly as a residence.
• The buyer and seller cannot be related as parent, child, grandparent, grandchild, or sibling.

Note: Texas Property Code 5.072 does not allow oral executory contracts. Executory contracts must be in writing and signed by both parties. Make sure any promises between the parties are written in the contract. A court will not enforce an oral promise in an executory contract.

The biggest risks to the buyer arise out of the fact that the buyer does not own the property until they satisfy the contract terms. This limits the buyer’s rights. While the contract is in effect, the buyer is unable to sell the home or borrow against the home’s full value.

Also, the buyer does not immediately start to gain equity in the home. No equity means if the buyer stops paying or otherwise breaks the contract, all the money paid up to that point may be lost.

40 or 48 Rule: A buyer who defaults does have some equity protection if they have paid 40% of the sale price, paid 48 months’ worth of installments, or the contract has been recorded with the county. In this case, the seller must go through foreclosure instead of merely taking back the property. If the property is sold through foreclosure, the buyer may get back some of the money they spent.

Sellers are required to record most executory contracts within 30 days of signing, which would trigger home equity protections. A recorded executory contract would normally require full foreclosure instead of basic eviction if the buyer defaults. However, do not take this for granted. Not all sellers comply with the recording requirement. Penalties for not recording are minimal. Also, they may not be required to record your contract.

Yes. Sellers are at risk if they fail to follow all the rules. There are many technical requirements a seller must meet. The seller may have to pay penalties if they do not meet all the requirements, even when acting in good faith.

Texas Property Code Chapter 5 lists the rights the buyer’s rights. A buyer may be entitled to certain remedies under the law if these rights are not met. In general, the buyer is entitled to:

• Know the condition of the property
• Know the financing terms of the contract
• Receive notice of any violations caused by the buyer
• Receive updates on any loans each year
• Receive a warranty deed to the property within 30 days of making the last payment

Texas Property Code Chapter 5 lists the duties that a seller must perform. A seller who does not perform these duties will be in violation of their contract. This will entitle a buyer to certain remedies under the law. Texas Property Code Chapter 5 states that a seller must:

• Provide a recent property survey which cannot be older than one year
• Must provide a tax certificate from each entity that collects taxes
• Must provide a copy of any insurance policy on the property
• Indicate all interest or late charges under the contract
• Provide a written annual accounting statement
• Disclose any issues with the property
• Provide notice, in writing, if the property is under a homeowners association
• Disclose whether the property is in a recorded subdivision or not
• Record the contract within 30 days of the signing of the contract

• The total amount paid
• The total amount still owed
• The remaining number of payments
• The amount paid in taxes
• The amount paid for any insurance
• The amounts collected from any insurance proceeds. This also includes how these proceeds have been used.
• Any change in insurance coverage and a copy of any insurance policy. It must also describe the insured property and say the amount that it is insured for.

• The property price
• The interest rates charged under the contract
• The total amount the buyer will pay under the contract, including interest
• Whether late charges apply and how much those charges may be
• A statement that the seller may not charge a prepayment penalty if the buyer wants to make partial of full advanced payments

Yes. Texas Property Code 5.082 allows a buyer to make such a request. The buyer may ask in writing how much they owe at any time. The seller then has 10 days to give the buyer this information. If the seller does not respond within 10 days, a buyer may pay off the property based on the amount the buyer believes is due under the contract. If the seller disagrees with the amount, then they must object within 20 days of the payment.

Yes. Texas Property Code 5.063 says the seller must tell the buyer if the buyer violates the contract. The notice must include what part of the contract they are violating, how much the buyer may owe, and what the seller intends to do about it.

Texas Property Code 5.063 gives very specific requirements for the notice to the buyer. Notice must be:

• In writing
• Delivered by registered or certified mail
• Printed in 14-point font
• Contain specific statutory language

• A buyer has 60 days to catch up on payments if any of the following is true:
  • If more than 40% of the contract has been paid
  • If more than 48 monthly payments have been paid
  • If the contract has been recorded
• In all other cases, a buyer only has 30 days to catch up on payments.

• If the buyer had 60 days to catch up on payments, the seller can only sell the property. Any funds from the sale of the property go towards paying off the remaining amount owed under the contract. Any extra funds go to the buyer.
• If the buyer only had 30 days to catch up on payments, the seller can rescind the contract or file to evict the buyer.

• If the buyer has paid 40% of the purchase price, made 48 monthly payments, or the contract is on the county record, then the seller can foreclose. The property will be sold and the new owner can evict the buyer. Sale proceeds will go toward paying what the buyer owes. Any money over that amount will go to the buyer.
• The seller can evict the buyer if the buyer has not paid 40% of the purchase price, has not made 48 monthly payments, and if the contract has not been recorded. If this happens, the buyer will have lost all the money they have paid.

• $250 for each day after 30 days have passed
• $500 for each day after 90 days have passed
• Reasonable attorney fees

• The seller must return any payments and reimburse the buyer for any improvements made to the property, or
• The seller can respond to the buyer to let them know the issue will be fixed. The seller then has 90 days to properly subdivide the property. If, after 90 days, the seller has not fixed the issue, the buyer then can cancel the contract.

The buyer has 14 days after signing to back out of the contract. To cancel, a buyer must send notice to the seller in person or by mail. The seller then has 10 days to return any payments or property exchanged under the contract.

• A late fee that is greater than 8% of the monthly payment or the actual cost of processing the late fee
• A restriction that does not allow a buyer to use the buyer’s interest in the property for a loan to make improvements to the property
• Early payment penalties 
• A penalty on the buyer for requesting repairs to the property or exercising any other rights under the contract.

Yes. Texas Property Code 5.076 requires that a seller record the contract with the county clerk. The seller must do so within 30 days after the contract has been signed. If the executory contract is cancelled for any reason, the seller must record that as well. If a seller does not record the contract, the buyer will have a claim against the seller for up to $500 a year plus attorney fees.

• A tax certificate from each entity that collects taxes on the property. The tax certificate shows tax’s paid, tax’s owed, delinquencies, penalties, etc.
• A copy of any insurance policy relating to the property. The policy must have the name of the insurer and the insured. It must also describe the insured property and list the insured amount.

• Texas Property Code 5.067 allows a seller to place a lien if the lien is for providing a utility service to the property or
• The seller and buyer agree.

No. Texas Property Code 5.068 requires a contract to be written in the language that it was primarily negotiated in. All documents relating to the contract must also be in this language. This includes the contract, any disclosure notices, annual accounting statements, and any notices of default.

Under Texas Property Code 5.078, insurance payouts are split between the buyer and seller. It is then up to the buyer and seller to use the money to repair the property.

Note: The seller has a responsibility to make the insurer aware of the contract. The seller must let the insurer know the name and address of the buyer. The seller must give the insurer this information within 10 days of the contract being signed or when insurance is bought for the property, whichever is later. If the seller fails to do so, the buyer may have a claim against the seller under Deceptive Trade Practices Act.

Yes. If a seller owes money to the buyer, Texas Property Code 5.084 allows the buyer to deduct that amount from what they owe the seller. The buyer does not have to go to court to do this. However, self-help remedies can often lead to trouble. Be careful if you plan to do this. You should first try to solve the situation by other means before you deduct any costs.

Watch this video from Lone Star Legal Aid to learn more about what rights homebuyers have under executory contracts.

Texas Property Code Chapter 5 Subchapter D – Executory Contracts

Deceptive Trade Practices Act